Micro Chapter Summarys
Chapter 6
After reading this chapter, you should be able to:
LO6-1
Use elasticity to describe the responsiveness of quantities to changes in price and distinguish five elasticity terms.
LO6-2
Explain the importance of substitution in determining elasticity of supply and demand.
LO6-3
Relate price elasticity of demand to total revenue.
LO6-4
Define and calculate income elasticity and cross-price elasticity of demand.
LO6-5
Explain how the concept of elasticity makes supply and demand analysis more useful.
Summary
Elasticity is defined as percentage change in quantity divided by percentage change in some variable that affects demand (or supply) or quantity demanded (or supplied). The most common elasticity concept used is price elasticity. (LO6-1)
Elasticity is a better descriptor than is slope because it is independent of units of measurement. (LO6-1)
To calculate percentage changes in prices and quantities, use the average of the end values. (LO6-1)
Five elasticity terms are elastic (E > 1); inelastic (E < 1); unit elastic (E = 1); perfectly inelastic (E = 0); and perfectly elastic (E = ∞). (LO6-1)
The more substitutes a good has, the greater its elasticity. (LO6-2)
Factors affecting the number of substitutes in demand are (1) time period considered, (2) the degree to which the good is a luxury, (3) the market definition, and (4) the importance of the good in one’s budget. (LO6-2)
The most important factor affecting the number of substitutes for supply is time. As the time interval lengthens, supply becomes more elastic. (LO6-2)
Elasticity changes along straight-line demand and supply curves. Demand becomes less elastic as we move down along a demand curve. (LO6-3)
When a supplier raises price, if demand is inelastic, total revenue increases; if demand is elastic, total revenue decreases; if demand is unit elastic, total revenue remains constant. (LO6-3)
Other important elasticity concepts are income elasticity and cross-price elasticity of demand. (LO6-4)
After reading this chapter, you should be able to:
LO6-1
Use elasticity to describe the responsiveness of quantities to changes in price and distinguish five elasticity terms.
LO6-2
Explain the importance of substitution in determining elasticity of supply and demand.
LO6-3
Relate price elasticity of demand to total revenue.
LO6-4
Define and calculate income elasticity and cross-price elasticity of demand.
LO6-5
Explain how the concept of elasticity makes supply and demand analysis more useful.
Summary
Elasticity is defined as percentage change in quantity divided by percentage change in some variable that affects demand (or supply) or quantity demanded (or supplied). The most common elasticity concept used is price elasticity. (LO6-1)
Elasticity is a better descriptor than is slope because it is independent of units of measurement. (LO6-1)
To calculate percentage changes in prices and quantities, use the average of the end values. (LO6-1)
Five elasticity terms are elastic (E > 1); inelastic (E < 1); unit elastic (E = 1); perfectly inelastic (E = 0); and perfectly elastic (E = ∞). (LO6-1)
The more substitutes a good has, the greater its elasticity. (LO6-2)
Factors affecting the number of substitutes in demand are (1) time period considered, (2) the degree to which the good is a luxury, (3) the market definition, and (4) the importance of the good in one’s budget. (LO6-2)
The most important factor affecting the number of substitutes for supply is time. As the time interval lengthens, supply becomes more elastic. (LO6-2)
Elasticity changes along straight-line demand and supply curves. Demand becomes less elastic as we move down along a demand curve. (LO6-3)
When a supplier raises price, if demand is inelastic, total revenue increases; if demand is elastic, total revenue decreases; if demand is unit elastic, total revenue remains constant. (LO6-3)
Other important elasticity concepts are income elasticity and cross-price elasticity of demand. (LO6-4)